Shoprite finds African pitfalls

For those who have been following Shoprite’s ascent from an SA-focused retailer in early 2000s to a multinational supermarket chain at the vanguard of the African discount grocery retail industry, it looked like a one-way bet on African growth.

The past few years have given both the management team led by Pieter Engelbrecht and shareholders a sobering reality check of the challenges of rolling out hundreds of stores in countries whose economic fundamentals are tied to commodity prices.

Sitting next to chair and biggest shareholder Christo Wiese, Engelbrecht told shareholders at an annual meeting in Cape Town this week that his company is in the middle of a review of its operations in the rest of Africa, where returns are lagging behind the cost of investments.

And, as Wiese has heard, shareholders want to know how Shoprite plans to deliver a turnaround for the business that in the quarter to end-September suffered a nearly 5% decline in sales, and signalled that the 2018 operating losses of more than R260m were not a one-off black swan event.

A few options are on the table, including the scaling back of store sizes, reining in capital expenditure, entering into franchise deals and, as a last resort, pulling out of problematic countries.

It is easy to sympathise with the frustrations of shareholders, who are used to a company that ground out consistent doubledigit growth in sales and core earnings from its outlets in 14 African countries outside the home market.

In August, the company revealed a disturbing spike in borrowings as it reported a disappointing 20% drop in profit in the year to end-June. As at the end of June, the company was sitting on a total R11.7bn debt, a disturbing 68% jump from a year earlier. The borrowings were racked up by the group’s enormous capital expenditure to roll out supermarkets across the continent and spending on state-ofthe-art IT systems to manage inventory.

Furthermore, investors have watched in dismay as the share price has slipped. The stock has dropped more than 20% so far this year to R139, a dramatic turnabout of fortunes for the stock that fetched nearly R270 just over a year ago.

Wiese is right. It would be foolish to think these days Africa would generate the same kind of returns on investment as the home market. For example, in Angola, Africa’s second-largest crude oil producer, a decline in oil prices and production has wreaked economic havoc in what was once Shoprite’s biggest money spinner. A combination of hyperinflation and a more than 60% devaluation of the kwanza currency have sharply reduced consumer spending power while an onerous regulatory environment around the importation of goods has left shelves empty.

It is more or less the same problem in Nigeria and Zambia, where currencies have sharply depreciated as prices of crude oil and copper export mainstays of the two countries dropped.

As result, Shoprite’s non-SA business fell into a R262m operating loss in the year ended June. That swing was behind Shoprite reporting a 20% decline in annual headline earnings per share during the period, and undermined its credentials as a defensive stock that can use its industry-leading profit margins to stay in the game during downturns.

But stripping out the rest of Africa business performance, Shoprite’s brands from no-frills USave to upmarket Checkers outlets are able to defy sluggish economic growth and weak consumer sentiment. The latest quarterly sales showed that supermarkets at home delivered a more than 10% increase in sales. SA still accounts for about three-quarters of Shoprite’s annual sales.

Though Shoprite is faring better than Massmart, whose shares are down nearly 70% from the R148 per share offer from Walmart in 2010, it is exhibit A for the pitfalls hidden in the chase for returns from consumers elsewhere on the continent.

SHAREHOLDERS WANT TO KNOW HOW SHOPRITE PLANS TO DELIVER A TURNAROUND FOR THE BUSINESS